Good morning, honourable members. I will speak partly in French and partly in English. I hope it doesn't bother you too much. If it does, please let me know.
My name is Bruno Gagnon, and I thank you for inviting the Canadian Institute of Actuaries to share our views on part 7 of Bill C-50 with regard to the creation of the Canada Employment Insurance Financing Board. As actuaries, our area of expertise is basically insurance, which includes social insurance, which in turn includes employment insurance.
Our profession holds our duty to the public above the needs of the profession and its members, and it is in that spirit that we made public our December 2007 report on EI financing and that we are appearing before your committee today.
The initiative outlined in the budget has the potential to create an excellent system. However, there are several elements of C-50 which, unless they are changed, could cause significant problems for workers, businesses and government.
We are very pleased that beginning in 2009, a system will be introduced that guarantees the premiums will track program costs. That will be a very positive outcome. However, it is our opinion that the requirements of the CEIFB to set rates based on estimates of the revenues looking forward only one year is seriously flawed and could cause problems.
The one-year pay-as-you-go approach is flawed, from our point of view. In our notes we have a scenario where we assume that a recession hits Canada. You probably all know that recessions do happen from time to time. The major problem with recessions in our current time is that no two recessions are identical; no two recessions have exactly the same causes. So a recession may hit Canada at some time. If you read the news, according to Warren Buffet the U.S. is now in a recession. So a recession can happen.
Let's assume that a recession hits Canada and unemployment levels rise to 8%, which is not that much; it's not unheard of. The payment to out-of-work Canadians increases by approximately $3 billion. So the $2 billion reserve of the board is depleted and the EI account has to borrow $1 billion from the government, even though we already have this $54 billion to $56 billion in the current notional EI account. So the EI account is forced to borrow $1 billion, and unemployment levels are rising and may rise even further. What happens then? We borrowed $1 billion so we have to repay $1 billion. We have to replenish the $2 billion reserve or cash balance, and we have to increase rates to take into consideration the higher unemployment level to repay the $2 billion reserve and the $1 billion loan.
In this situation we might have to raise the premiums above the legislated limit of 0.15%. Consideration of applying the 0.15% would fall to ministers. It would not be a very easy decision, because if you applied the 0.15% ceiling you would run a deficit and the deficit would accumulate. The impact on Canadian businesses, which pay nearly 60% of the cost of employment insurance, would be huge, because at exactly the same time, profits would be lower and limited. Cashflows would also be lower. Workers would have to pay 40% of the cost when they were already at risk of losing their jobs, and businesses would need to find money somewhere.
So even during an economic downturn that was not very deep--an 8% unemployment rate is not that deep--the one year going forward would necessitate raising premiums on each occasion. We believe this is significantly pro-cyclical, and as actuaries we are not comfortable with a pro-cyclical mechanism and the one-year-going-forward basis.
Under the proposed system, premium rates could vary irregularly from one year to the next, even if nothing unusual happens, simply to offset the errors made in forecasting.
The $2 billion reserve has no preventive effect, because it has to be replenished each year. No financial burden is imposed on the government, because the board's operations are fully consolidated with those of the government. That makes us feel rather uneasy.
There are also a number of restrictions in Bill C-50 that run counter to the promise of independence made by the Minister of Finance in his February 26 budget.
We think it would be preferable to determine premium rates over a five- to seven-year period, which is closer to an economic cycle.
If Canada had kept to an insurance model with a typical actuarial process similar to what we are recommending, the EI system would currently have a $15 billion reserve, not a reserve over $54 billion. So we recommend that premium rates be set taking into account a five- to seven-year period. We recommend that Bill C-50 be amended to allow the chief actuary and board considerably more latitude in the assumptions and projections used to develop the premium rates, taking into account once again the five- to seven-year time horizon. Finally, the institute reiterates its position of principle that the existing surplus belongs to the EI system and its contributors and should be addressed clearly once and for all.
As a final closing comment, if we had applied a typical actuarial process to this whole thing, we would currently have a $15 billion reserve in the EI account, and the remainder would be something else.